Smarter folks than I could probably draw some inference from the
extent of government backing of academia or BigMed and the way they
raise prices, I prefer to look at pictures. From dShort comes a
fascinating series of charts:

This week, President Barack Obama held a summit with a
dozen higher-education leaders “to discuss rising college costs
and strategies to reduce these costs while improving quality.”
The administration plans to introduce some policy proposals in
the run-up to the presidential campaign.

Any serious policy reform has to start by considering a
heretical idea: Federal subsidies intended to make college more
affordable may have encouraged rapidly rising tuitions.
It’s not as crazy as it might sound.

As veteran education-policy consultant Arthur M. Hauptman
notes in arecent essay: “There is a strong correlation over
time between student and parent loan availability and rapidly
rising tuitions. Common sense suggests that growing availability
of student loans at reasonable rates has made it easier for many
institutions to raise their prices, just as the mortgage
interest deduction contributes to higher housing prices.”

It’s a phenomenon familiar to economists. If you offer
people a subsidy to pursue some activity requiring an input
that’s in more-or-less fixed supply, the price of that input
goes up. Much of the value of the subsidy will go not to the
intended recipients but to whoever owns the input. The classic
example is farm subsidies, which increase the price of farmland.

Increasing Salaries
A 1998 article in the American Economic Review explored
another example: federal research and development subsidies.
Like farmland, the supply of scientists and engineers is fairly
fixed, at least in the short run. Unemployed journalists and
mortgage brokers can’t suddenly turn into electrical engineers
just because there’s money available, and even engineers and
scientists are unlikely to switch specialties. So instead of
spurring new activity, much of the money tends to go to increase
the salaries of people already doing such work. From 1968 to
1994, a 10 percent increase in R&D spending led to about a 3
percent increase in incomes in the subsidized fields.

“A major component of government R&D spending is windfall
gains to R&D workers,” the paper concluded. “Incomes rise
significantly while hours rise little, and the increases are
concentrated within the engineering and science professions in
exactly the specialties heavily involved in federal research."...MORE